Q3 2024 Earnings Summary
- Hanesbrands significantly reduced its debt by paying down $870 million in October, putting them on track to reduce debt by $1 billion in the second half of the year, leading to a decrease in leverage ratio by approximately 1.5x year-over-year, and they expect to end 2025 at approximately 3x net debt to adjusted EBITDA.
- The company is delivering structurally higher and sustainable margins, achieving an all-time high gross margin of 41.8% in Q3, and expects to continue expanding gross margins through assortment management, SKU reduction, margin-accretive innovation, and cost savings initiatives that are a step function change in their cost structure, driving sustainable margins in 2025 and beyond.
- Hanesbrands anticipates returning to sales growth in Q4, expecting 3% growth over last year on an organic constant currency basis, driven by incremental holiday and brand programs, space gains, a rebounding Australian wholesale business, increased brand investments, and overlapping a challenging Q4 last year, while also continuing to take market share.
- The company's gross margin expansion may be plateauing, as they expect fourth-quarter gross margins to be similar to the third quarter's 41.8%, which was an all-time high, indicating potential challenges in further margin improvement.
- The ongoing challenging consumer environment continues to impact sales, and the company acknowledges that they have not come out of it yet, which could impede expected sales growth and market share gains.
- Potential dissynergies or costs associated with the separation of the Champion brand may negatively affect financial performance, as the company indicates that there were dedicated Champion facilities and that they are taking that cost directly out, with plans to get those costs out by mid-next year, implying that these costs may persist in the near term.
-
Gross Margin Outlook
Q: How will gross margins trend next quarter and beyond?
A: We are pleased with our all-time high gross margin of 41.8% in Q3. For Q4, we are guiding margins to remain flat at around 41.8%. Looking ahead, we anticipate sustainable, structural margin expansion driven by assortment management and cost savings. We've reduced 50% of our SKUs, eliminating underperforming, margin-dilutive products. Additionally, we're scaling margin-accretive innovations and have detailed cost-saving plans spanning cost of sales and SG&A. We have great visibility into our costs and are confident we can deliver year-over-year margin expansion next year and beyond. -
Cost Outlook and Margin Improvement
Q: What's the outlook for ocean freight and cotton costs next year?
A: We're well-positioned for the next several quarters on ocean freight, with most moves inside our contracts. Freight rates are running below our plans, particularly in the Western Hemisphere. We're offsetting any pressure and feel good about freight and input costs for next year. We're basically bought up for cotton for almost the whole year next year, so we don't expect any fluctuation there. We feel really good about our gross margin, having seen improvement throughout the year to an all-time high this quarter, and expect strong gross margin improvement as we go into next year. -
Debt Repayment and Leverage
Q: What debt did you repay in October, and what's the future plan?
A: We paid down $170 million of debt in October, mainly from the Champion proceeds and internal cash generation. The repayment was a mix of Term A and Term B loans, with a heavier focus on Term B. We're on track for a $1 billion debt paydown this year, which will reduce our leverage by about 1.5 turns year-over-year. Going into next year, with margin improvement and cash flow, we expect to reach around 3x leverage by the end of next year. We feel really good about this progress. -
Improving Sales Trends
Q: What's driving your confidence in improving sales trends?
A: We anticipated sales would improve sequentially throughout the year and turn positive in Q4. Drivers include incremental holiday and brand programs not present last year. Our Australian wholesale business is starting to rebound, and brand investment is working. While the consumer environment remains challenging, POS data is starting to improve slightly. We've factored all this into our guidance and expect to continue improving in Q4 and take market share. -
Inventory Levels and Holiday Outlook
Q: Can you comment on retail inventory levels and holiday visibility?
A: We feel pretty good about inventory levels, though there's always variability across retailers. All our holiday programs have been shipped and are loaded with our retail partners. Retail inventory is up slightly year-over-year. For the holiday, our shipments are up; we've gained incremental space and increased our share. While we're reducing our own inventory, down 13% year-over-year in the quarter, we're rebalancing with retailers and feel really good about our holiday load-in. -
Brand Investment Level
Q: What's the right level of brand investment long-term?
A: We're targeting roughly a 5% investment level, which is where we were this quarter. We think 5% is the right number when we consider our business segments, global footprint, and brands. It may vary slightly quarter to quarter, but we're locked into that number now. As we're already at this level, future cost savings will be incremental to profit and margin. We feel good about where we are and the returns we're getting on that investment. -
Champion Divestiture and Cost Savings
Q: Are there dis-synergies from separating Champion manufacturing capacity?
A: As we back out Champion from our business, we've identified dedicated and shared facilities and are taking those costs directly out. We have plans to eliminate potential stranded costs by the middle of next year and are going further by accelerating structural changes. This is playing out faster than anticipated, and we're seeing it in our gross margin. We don't expect any hangover and actually expect to improve coming out of this.